What do you pay for Productivity?

A number of people appear to be surprised that Ford is shedding a further 440 jobs only a couple of months after receiving hundreds of Millions of tax payer money to prop up jobs with the company. Further, it appears that the Falcon will stop soaring altogether and crash to the ground in a couple of years’ time. Anyone who is surprised by this shouldn’t be, Ford and a growing proportion of Australian Manufacturers have been incurring growing losses for years. Throwing money at a problem without addressing the cause of the issue is akin to flushing notes down the toilet. Despite protectionist measures (high taxes on imported products, which in turn drives up prices for consumers), our manufacturing sector remains uncompetitive due to a number of factors:

very high labour costs without world leading productivity to offset it

despite abundant raw materials and energy on our doorstep, we have amongst the highest power and material costs in the world

Ford’s problems also stem from a lack of innovation and not understanding market demand, as buyers have changed preferences to smaller and more fuel efficient cars. They aren’t alone in that regard, with companies like Darryl Lea in the same predicament. McDonalds on the other hand has been adapting to changing trends and announced it is putting on 3,000 workers, which also no doubt has to do with that you’d struggle to find a business that understands Productivity better than they do.

For a country or company to be competitive with a high operational cost, they need to offer something different and have highly efficient use of production inputs. Boston Consulting Group recently presented a comparison of shareholder returns, and found for the past two years it was 2.5% in Australia against 8.3% in the UK and 14.7% in the US. The worst part is that you need to add in the fact that Australian businesses have had a “free kick” with our GDP growth being more than twice as high (mitigating the effects of our strong dollar). The reason was that we have very poor capital efficiency, not anywhere near best practice, with resources and energy companies being singled out as the worst performers. And these are the companies we are hailing as driving the future prosperity of our nation!

The default strategy in Australia was to drive improvements by trimming costs and laying off staff. Successful companies act differently – they innovate and invest in tough times. They also act decisively by first analysing the business and cutting parts that are uncompetitive, that is, look at productivity. Although you might have a cost target, an edict to cut a certain percentage of the workforce doesn’t work – you need to first understand what value those people or sections provide to your customers. A lot can be learnt from the turnaround of General Motors over the last two years from basket case to sustainable business, despite also battling many of the above issues.

Telstra ‘s 2012 Productivity Survey concluded that only 24% of Australian corporate and Government organisations recorded significant productivity gains in 2012 (down from 32% the year before). Most companies (80%) regarded productivity as important, but only 20% (down from 24%) measured it. If you don’t know your productivity, how can you make decisions to improve it?

Perhaps belatedly, some of our mining companies are now starting to look at productivity. This is an essential activity, particularly as commodities prices start to drop. One of the major miners is looking at it as simply as number of staff/hours worked per tonne of production on one site or section compared to another comparable operation. Then they drill down to look at why one site is less productive, and what activities are done that are not essential to providing value or output. As the old advice goes, if you keep doing what you are doing you will get the same result. I argue you’ll get a worse result, because the world around you keeps evolving. So it is only through changing current operations that you will get a better outcome.

In our businesses, we have four workshops. Three of them have been industry leading in terms of efficiency, quality and productivity for some time. However, when we compared our fourth workshop, which also happened to be the “largest”, we found both quality and productivity was falling behind. We struggled with many of the same issues that most of our industry has to deal with, but made the decision we couldn’t let “near enough be good enough” and addressed these issues. At first, we lost one third of the workforce. Interestingly, the output remained about the same. Further analysis led us to come back to our sustainable competitive advantages: do what we know we can do well (and let others do work we aren’t set up for), and focus on the quality and value for money products we are known for. Some of our people didn’t share the Values of our business or lacked the required knowledge we expected them to have as professionals in their field, and moved on. We now have efficient, quality focussed individuals working as a Team giving our customers the results they expect and can trust. Whilst there was some pain in this process, our workshop is now a healthy operation in every aspect, and all our workshops are busy again.

From the above examples, the question is not what you pay for Productivity. With Industrial Action prompted by job insecurities increasing in Australia, it’s time we started asking the question and calculating the cost of NOT having high productivity. The world doesn’t pay per hour anymore, it pays for an outcome. Businesses and Government can’t afford to bumble along ignoring the issues or making marginal improvements. The rest of the world is passing us by whilst we become pre-occupied with finding excuses. Unless we measure and raise productivity, the day will come when we wonder where our industries, jobs and businesses went. What are you measuring in your business?